Insolvent but still want to adjudicate: is it worth it?

Further to our blog on ‘The final determination – insolvency set off precludes adjudication’, and the subsequent appeal by Bresco to set aside the order of the injunction that prevented the continuation of an adjudication in the liquidation, the Court of Appeal has upheld the injunction, but for reasons of practicality rather than insolvency set-off precluding adjudication.

Practical utility

The Court of Appeal determined that there was nothing to be gained from Bresco pursuing the adjudication, as any enforcement either would be stayed, or in fact, would fail, thereby effectively deeming the adjudication pointless. It was considered that the responding party would be exposed to the risk that any judgment sum would not be repaid, due to the liquidation of the claimant company. Moreover, in the circumstances where the responding party has a cross-claim, it would effectively be prevented from enforcing its security against the cross-claim. The injunction therefore prevents wasted costs, which is significant in circumstances where there is no security for costs or such costs cannot be recovered due to the insolvency of the claimant.

In particular, the Court rejected the argument that an adjudicator did not have jurisdiction, and held that insolvency set-off does not extinguish the underlying claims and does not preclude adjudication. It was not relevant that adjudication is only temporarily binding. An adjudication can become final where both parties agree to treat it as final or one party fails to challenge the decision.

The Court applied the principles in Stein v Blake [1996] 1 AC 243 in that, once all calculations had been resolved and determined, strictly speaking, there was only a single enforceable claim for the net balance. In that case, it was envisaged the underlying claims continued to exist for the purposes of determining the balance, and did not exclude the underlying claims from being the subject matter of an adjudication.

A possible exception includes where the insolvent party’s financial position is wholly or significantly caused by the responding party’s failure to pay the sums awarded by an adjudication, in which case the insolvency may not be sufficient to justify the grant of a stay on adjudication.

Impact and future role of adjudication

This significant case highlights that the Courts are prepared to refuse to enforce an adjudication decision concerning a company in liquidation, on the basis that it would be futile and serves no practical purpose. Although it is worth noting there may be exceptional circumstances where an adjudication could have practical utility, the Judge was emphatic that the case reveals the incompatibility between the adjudication and insolvency processes.

Ultimately, the Court of Appeal confirmed that automatic insolvency set-off does not extinguish any underlying claims for all purposes. Whilst the construction industry continues to be vulnerable to financial distress, it remains that this decision is likely to have widespread implications, including in relation to the practice of liquidators who refer disputes to adjudication. Insolvency officeholders will need to consider whether referring a dispute to adjudication would be futile, taking into account the legal and practical considerations.

If you would like to discuss the insolvency aspects of the above case, please feel free to contact Kunal Gadhvi – Partner, or Felicity Jordan – Associate, of our Restructuring & Insolvency Team.

Please feel free to also contact Nik Haria – Partner of our Construction Team, if you would like to discuss construction contract claims including adjudication issues.

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